Documents found in this filing:

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number 000-07246

PETROLEUM DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

(Doing Business as PDC Energy)

Nevada

95-2636730

(State of Incorporation)

(I.R.S. Employer Identification No.)

1775 Sherman Street, Suite 3000

Denver, Colorado 80203

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (303) 860-5800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer £

Accelerated filer x

Non-accelerated filer £

(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 23,496,892 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 22, 2011.

This periodic report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") regarding our business, financial condition, results of operations and prospects. All statements other than statements of historical facts included in and incorporated by reference into this report are "forward-looking statements" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements herein, which include statements of estimated natural gas, NGL and crude oil production and reserves, drilling plans, future cash flows, anticipated liquidity, anticipated capital expenditures, including our ability to fund our 2011 capital plan, our compliance with our debt covenants and the indenture restrictions governing our senior notes, sufficient liquidity to meet our partnership repurchase obligation, the adequacy of our casualty insurance coverage, the impact of decreased commodity prices on future borrowing base redeterminations, the effectiveness of our derivative policies in achieving our risk management objectives, the decrease during the next twelve months of our liability for uncertain tax benefits, funding sources for our acquisitions, the acceleration of our capital spending program due to a rise in crude oil prices, the potential operational benefits and cost synergies due to the acquisition of certain partnerships and our management’s strategies, plans and objectives. However, these are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, including known and unknown risks and uncertainties incidental to the exploration for, and the acquisition, development, production and marketing of natural gas, NGLs and crude oil, and actual outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:

•

changes in production volumes and worldwide demand;

•

volatility of commodity prices for natural gas and crude oil;

•

changes in estimates of proved reserves;

•

inaccuracy of reserve estimates and expected production rates;

•

declines in the values of our natural gas and crude oil properties resulting in impairments;

•

the future cash flow, liquidity and financial position of the Company;

•

the timing and extent of our success in discovering, acquiring, developing and producing reserves;

risks incidental to the drilling and operation of natural gas and crude oil wells;

•

the availability of sufficient pipeline and other transportation facilities to carry our production and the impact of these facilities on price;

•

the effect of existing and future laws, governmental regulations and the political and economic climate of the U.S. as well as other oil producing countries throughout the world;

•

changes in environmental laws, the regulation and enforcement of those laws and the costs to comply with those laws;

•

the impact of environmental events, governmental responses to the events and our ability to insure adequately against such events;

•

competition in the oil and gas industry;

•

the success of the Company in marketing oil and gas;

•

the effect of natural gas and crude oil derivatives activities;

•

the availability and cost of capital to us;

•

our ability to consummate the prospective mergers of the 2005 partnerships and the timing of consummating these mergers, if at all;

•

losses possible from pending or future litigation; and

•

the success of strategic plans, expectations and objectives for future operations of the Company.

Further, we urge you to carefully review and consider the cautionary statements and disclosures, specifically those under the heading "Risk Factors," made in this report, our annual report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission ("SEC") on February 24, 2011, as amended April 21, 2011 ("2010 Form 10-K"), and our other filings with the SEC for further information on risks and uncertainties that could affect the Company's business, financial condition and results of operations, which are incorporated by this reference as though fully set forth herein. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any forward-looking statements in order to reflect any event or circumstance occurring after the date of this report or currently unknown facts or conditions or the occurrence of unanticipated events. All forward looking statements are qualified in their entirety by this cautionary statement.

3

REFERENCES

Unless the context otherwise requires, references to "PDC," "PDC Energy," "the Company," "we," "us," "our," "ours" or "ourselves" in this report refer to the registrant, Petroleum Development Corporation and its consolidated entities. See Note 1, Nature of Operations and Basis of Presentation, to our condensed consolidated financial statements included in this report for a description of our consolidated entities.

References to "the three months ended 2011" refer to the three months ended March 31, 2011, as applicable. References to "the three months ended 2010" refer to the three months ended March 31, 2010, as applicable.

Deconsolidation/change in ownership effect on cash and cash equivalents

(101

)

(3,074

)

Proceeds from sale of leaseholds/assets

9,952

16

Net cash used in investing activities

(61,228

)

(35,639

)

Cash flows from financing activities:

Proceeds from credit facility

—

64,000

Payment of credit facility

—

(85,000

)

Contribution by investing partner in PDCM

6,407

—

Other

(328

)

(190

)

Net cash provided by (used in) financing activities

6,079

(21,190

)

Net decrease in cash and cash equivalents

(39,673

)

(5,484

)

Cash and cash equivalents, beginning of period

54,372

31,944

Cash and cash equivalents, end of period

$

14,699

$

26,460

Supplemental cash flow information:

Cash payments (receipts) for:

Interest, net of capitalized interest

$

12,314

$

7,067

Income taxes, net of refunds

85

(33

)

Non-cash investing activities:

Change in accounts payable related to purchases of properties and equipment

5,832

6,056

Change in asset retirement obligation, with a corresponding increase to properties and equipment, net of disposals

229

207

See accompanying Notes to Condensed Consolidated Financial Statements

7

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

(unaudited)

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

PDC Energy is a domestic independent natural gas and crude oil company engaged in the exploration for and the acquisition, development, production and marketing of natural gas, natural gas liquids ("NGLs") and crude oil. As of March 31, 2011, we owned an interest in approximately 5,000 wells located primarily in the Rocky Mountain Region and the Permian and Appalachian Basins. We operate through two business segments: (1) natural gas and crude oil sales and (2) natural gas marketing.

The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly-owned subsidiaries, an entity in which we have a controlling financial interest and our proportionate share of PDC Mountaineer, LLC ("PDCM") and 29 of our affiliated partnerships. Pursuant to the proportionate consolidation method, our accompanying financial statements include our pro rata share of assets, liabilities, revenues and expenses of the entities which we proportionately consolidate. All material intercompany accounts and transactions have been eliminated in consolidation. As of March 31, 2011, PDCM was consolidated at 52.7% and the 29 partnerships were consolidated at varying percentages.

As of December 31, 2010, PDCM was consolidated at 55.8%, representing our ownership interest. On January 1 and March 1, 2011, our joint venture partner made capital contributions of cash to PDCM of $7 million and $5 million, respectively. The contributions resulted in our ownership interest decreasing from 55.8% to 53.9%, then to 52.7%. Each change in our ownership interest resulted in a decrease in our proportionate share of net assets and any future earnings.

With the exception of our initial capital contribution in October 2009, we have not entered into any arrangement that would require us to provide financial support to PDCM. Further, we are not liable for any debts, obligations or liabilities of the joint venture and its creditors have no recourse against our general credit in the event of default. None of our affiliated partnerships’ wells were included in the joint venture.

The following table presents the carrying amount and classification of our proportionate share of PDCM's assets and liabilities included in our balance sheets.

March 31, 2011

December 31, 2010

(in thousands)

Cash and cash equivalents

$

1,808

$

1,560

Other current assets

2,560

3,206

Property, plant and equipment, net

103,018

101,679

Other assets

1,979

1,986

Total assets

$

109,365

$

108,431

Total current liabilities

$

6,622

$

4,641

Asset retirement obligations

8,322

8,681

Other liabilities

1,784

1,370

Equity

92,637

93,739

Total liabilities and equity

$

109,365

$

108,431

In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The information presented in this quarterly report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2010 Form 10-K. Our accounting policies are described in the Notes to Consolidated FinancialStatements in our 2010 Form 10-K and updated, as necessary, in this Form 10-Q. The results of operations for the three months ended 2011, and the cash flows for the same period, are not necessarily indicative of the results to be expected for the full year or any other future period.

Certain reclassifications have been made to prior period financial statements to conform to the current year presentation. The reclassifications are directly related to our discontinued operations. The reclassifications had no impact on previously reported cash flows, net income, earnings per share or shareholders' equity. See Note 12 for additional information regarding our discontinued operations.

8

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 2 - RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

Fair Value Measurements and Disclosures. In January 2010, the FASB issued changes related to fair value measurements requiring gross presentation of activities within the Level 3 roll forward, whereby entities must present separately information about purchases, sales, issuances and settlements. These changes were effective for our financial statements issued for the annual reporting period, and for interim reporting periods within the year, beginning after December 15, 2010. The adoption of this change did not have a material impact on our financial statements.

NOTE 3 - FAIR VALUE MEASUREMENTS AND DISCLOSURES

Derivative Financial Instruments

The following table presents, for each hierarchy level, our derivative assets and liabilities, both current and non-current portions, including the derivative assets and liabilities designated to our affiliated partnerships and our proportionate share of PDCM's derivative assets and liabilities, measured at fair value on a recurring basis.

March 31, 2011

December 31, 2010

Quoted Prices inActive Markets(Level 1)

SignificantUnobservableInputs(Level 3)

Total

Quoted Prices inActive Markets(Level 1)

SignificantUnobservableInputs(Level 3)

Total

(in thousands)

Assets:

Commodity based derivatives contracts

$

58,740

$

18,624

$

77,364

$

64,138

$

23,168

$

87,306

Basis protection derivative contracts

—

60

60

—

111

111

Total assets

58,740

18,684

77,424

64,138

23,279

87,417

Liabilities:

Commodity based derivatives contracts

644

39,717

40,361

51

20,011

20,062

Basis protection derivative contracts

—

45,842

45,842

—

46,580

46,580

Total liabilities

644

85,559

86,203

51

66,591

66,642

Net asset (liability)

$

58,096

$

(66,875

)

$

(8,779

)

$

64,087

$

(43,312

)

$

20,775

9

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table presents a reconciliation of our Level 3 fair value measurements.

Three Months Ended March 31,

2011

2010

(in thousands)

Fair value, net liability, beginning of period

$

(43,312

)

$

(28,994

)

Changes in fair value included in statement of operations line item:

Commodity price risk management gain (loss), net

(24,405

)

12,431

Sales from natural gas marketing

14

383

Cost of natural gas marketing

(6

)

(3,293

)

Changes in fair value included in balance sheet line item (1):

Accounts receivable affiliates

(104

)

(2,320

)

Accounts payable affiliates

(654

)

(4,538

)

Settlements included in statement of operations line items:

Commodity price risk management gain (loss), net

720

(20,980

)

Sales from natural gas marketing

(75

)

—

Cost of natural gas marketing

947

(5

)

Fair value, net liability, end of period

$

(66,875

)

$

(47,316

)

Changes in unrealized gains (losses) relating to assets (liabilities) still held

as of period end, included in statement of operations line item:

Commodity price risk management gain (loss), net

$

(18,906

)

$

8,477

Sales from natural gas marketing

(7

)

353

Cost of natural gas marketing

(46

)

(3,604

)

$

(18,959

)

$

5,226

__________

(1) Represents the change in fair value related to derivative instruments entered into by us and designated to our affiliated partnerships.

The carrying values of the financial instruments comprising current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.

The portion of our long-term debt related to our credit facility approximates fair value due to the variable nature of its related interest rate. We have not elected to account for the portion of our long-term debt related to our senior notes under the fair value option; however, as of March 31, 2011, we estimate the fair value of the portion of our long-term debt related to the 3.25% convertible senior notes due 2015 to be $151.9 million or 132.1% of par value and the portion related to our 12% senior notes due 2018 to be $229.9 million or 113.2% of par value. We determined these valuations based upon measurements of broker/dealer quotes and trading activity, respectively.

NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS

As of March 31, 2011, we had derivative instruments in place for a portion of our anticipated production through 2015 for a total of 43,533.4 BBtu of natural gas and 2,685.8 MBbls of crude oil.

The following table presents the location and fair value amounts of our derivative instruments on the balance sheets. These derivative instruments were comprised of commodity floors, collars and swaps, basis protection swaps and physical sales and purchases.

10

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Fair Value

Derivatives instruments not designated as hedges (1):

Balance sheet line item

March 31,2011

December 31,2010

(in thousands)

Derivative assets:

Current

Commodity contracts

Related to natural gas and crude oil sales

Fair value of derivatives

$

30,500

$

32,837

Related to affiliated partnerships (2)

Fair value of derivatives

8,471

8,231

Related to natural gas marketing

Fair value of derivatives

1,171

1,811

Basis protection contracts

Related to natural gas marketing

Fair value of derivatives

48

74

40,190

42,953

Non Current

Commodity contracts

Related to natural gas and crude oil sales

Fair value of derivatives

26,845

32,270

Related to affiliated partnerships (2)

Fair value of derivatives

10,297

12,111

Related to natural gas marketing

Fair value of derivatives

80

46

Basis protection contracts

Related to natural gas marketing

Fair value of derivatives

12

37

37,234

44,464

Total derivative assets

$

77,424

$

87,417

Derivative liabilities:

Current

Commodity contracts

Related to natural gas and crude oil sales

Fair value of derivatives

$

20,487

$

10,636

Related to affiliated partnerships (3)

Fair value of derivatives

1,986

1,676

Related to natural gas marketing

Fair value of derivatives

912

1,492

Basis protection contracts

Related to natural gas and crude oil sales

Fair value of derivatives

13,665

11,725

Related to affiliated partnerships (3)

Fair value of derivatives

5,215

4,462

Related to natural gas marketing

Fair value of derivatives

1

7

42,266

29,998

Non Current

Commodity contracts

Related to natural gas and crude oil sales

Fair value of derivatives

16,943

6,231

Related to affiliated partnerships (3)

Fair value of derivatives

—

(3

)

Related to natural gas marketing

Fair value of derivatives

33

30

Basis protection contracts

Related to natural gas and crude oil sales

Fair value of derivatives

19,442

21,905

Related to affiliated partnerships (3)

Fair value of derivatives

7,518

8,481

Related to natural gas marketing

Fair value of derivatives

1

—

43,937

36,644

Total derivative liabilities

$

86,203

$

66,642

__________

(1)As of March 31, 2011, and December 31, 2010, none of our derivative instruments were designated as hedges.

(2) Our balance sheets include a corresponding payable to our affiliated partnerships of $18.8 million and $20.3 million as of March 31, 2011, and December 31, 2010, respectively.

(3) Our balance sheets include a corresponding receivable from our affiliated partnerships of $14.7 million and $14.6 million as of March 31, 2011, and December 31, 2010, respectively.

11

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table presents the impact of our derivative instruments on our statements of operations.

Concentration of Credit Risk. We make extensive use of over-the-counter derivative instruments that enable us to manage a portion of our exposure to price volatility from producing and marketing natural gas and crude oil. These arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions, who are also major lenders in our credit facility agreement, as counterparties to our derivative contracts. To date, we have had no counterparty default losses. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, the impact of the nonperformance of our counterparties on the fair value of our derivative instruments was not significant.

The following table presents the derivative counterparties that expose us to credit risk.

Counterparty Name

Fair Value ofDerivative AssetsAs of March 31, 2011

(in thousands)

JPMorgan Chase Bank, N.A. (1)

$

35,522

Crèdit Agricole CIB (1)

25,370

Wells Fargo Bank, N.A. (1)

13,667

Various (2)

2,865

Total

$

77,424

________________________

(1)Major lender in our credit facility, see Note 7.

(2)Represents a total of 19 counterparties, including two lenders in our credit facility.

12

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 5 - PROPERTIES AND EQUIPMENT

The following table presents the components of properties and equipment, net.

March 31, 2011

December 31, 2010

(in thousands)

Properties and equipment, net:

Natural gas and crude oil properties

Proved

$

1,488,520

$

1,429,667

Unproved

69,906

79,053

Total natural gas and crude oil properties

1,558,426

1,508,720

Pipelines and related facilities

34,203

34,262

Transportation and other equipment

32,456

32,410

Land, buildings and leasehold improvements

14,514

13,379

Construction in progress

54,260

42,128

1,693,859

1,630,899

Accumulated DD&A

(540,902

)

(510,861

)

Properties and equipment, net

$

1,152,957

$

1,120,038

NOTE 6 - INCOME TAXES

We evaluate our estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and enacted tax laws. The estimated annual effective tax rate is adjusted quarterly based upon actual results and updated operating forecasts; consequently, based upon the mix and timing of our actual earnings compared to annual projections, our effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. A tax expense or benefit unrelated to the current year income or loss is recognized in its entirety as a discrete item of tax in the period identified. The quarterly income tax provision is generally comprised of tax on income or tax benefit on loss at the most recent estimated annual effective tax rate, adjusted for the effect of discrete items.

The effective tax rate for continuing operations for the three months ended 2011, was 38.1% compared to 37.6% for the three months ended 2010. The tax benefit recognized for the three months ended 2011 has been limited to the amount expected to be realized during the year. The limitation was $1.2 million. The effective tax rate differs from the statutory rate primarily due to net permanent deductions, largely percentage depletion, increasing the tax benefit on loss for this period, while decreasing the tax provision on pretax income for the same prior year period. There were no significant discrete items recorded during each of the three months ended 2011 or 2010.

As of March 31, 2011, we had a gross liability for uncertain tax benefits of $1.2 million, which was substantially unchanged from December 31, 2010. If recognized, $1.1 million of this liability would affect our effective tax rate. This liability is reflected in other accrued expenses on our accompanying balance sheet. In 2010, the Internal Revenue Service ("IRS") commenced its examination of our 2007, 2008 and 2009 tax years. This examination is expected to be completed during the second quarter of 2011. Therefore, we expect the liability for uncertain tax benefits to decrease significantly during the next twelve-month period as items are either resolved without change, converted to amounts due to the IRS or removed due to the expiration of the statute of limitations.

As of the date of this filing, we are current with our income tax filings in all applicable state jurisdictions and currently have no state income tax returns in the process of examination.

13

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 7 - LONG-TERM DEBT

Long-term debt consists of the following:

March 31, 2011

December 31, 2010

(in thousands)

Senior notes

3.25% Convertible senior notes due 2016:

Principal amount

$

115,000

$

115,000

Unamortized discount

(19,310

)

(20,252

)

3.25% Convertible senior notes due 2016, net of discount

95,690

94,748

12% Senior notes due 2018:

Principal amount

203,000

203,000

Unamortized discount

(1,981

)

(2,053

)

12% Senior notes due 2018, net of discount

201,019

200,947

Total senior notes

296,709

295,695

Total long-term debt

$

296,709

$

295,695

Senior Notes

3.25% Convertible Senior Notes Due 2016. In November 2010, we issued $115 million of 3.25% convertible senior notes due 2016 in a private placement. The maturity for the payment of principal is May 15, 2016. Interest at the rate of 3.25% per year is payable in cash semiannually in arrears on each May 15 and November 15, commencing on May 15, 2011. We allocated the gross proceeds of the convertible notes between the liability and equity components of the debt. The initial $94.3 million liability component was determined based on the fair value of similar debt instruments, excluding the conversion feature, with similar terms and priced on the same day we issued our convertible notes. The original issue discount and the deferred note issuance costs are being amortized to interest expense over the term of the debt using an effective interest rate of 7.4%. We have initially elected a net-settlement method to satisfy our conversion obligation, which allows us to settle the $1,000 principal amount of the convertible notes in cash and to settle the excess conversion value in shares, as well as cash in lieu of fractional shares.

12% Senior Notes Due 2018. In 2008, we issued $203 million of 12% senior notes due 2018 in a private placement. The maturity for the payment of principal is February 15, 2018. Interest at the rate of 12% per year is payable in cash semiannually in arrears on each February 15 and August 15. The senior notes were issued at a discount, 98.572% of the principal amount. The indenture governing the notes contains customary representations and warranties as well as typical restrictive covenants. The original issue discount and the deferred note issuance costs are being amortized to interest expense over the term of the debt using the effective interest method.

We were in compliance with all covenants related to our senior notes as of March 31, 2011, and expect to remain in compliance throughout the next twelve-month period.

Bank Credit Facilities

Subsequent to March 31, 2011, on May 6, 2011, we completed the redetermination of our corporate bank credit facility's borrowing base. Similarly, PDCM completed its redetermination on April 20, 2011. See Note 15 for further discussion.

Corporate Bank Credit Facility. We operate under a credit facility dated as of November 5, 2010, as amended December 22, 2010, with an aggregate revolving commitment or borrowing base of $321.2 million. The maximum allowable facility amount is $600 million. The credit facility is with certain commercial lending institutions and is available for working capital requirements, capital expenditures, acquisitions, general corporate purposes and to support letters of credit.

Our credit facility borrowing base is subject to size redetermination semiannually based on a valuation of our reserves at December 31 and June 30 and is also subject to a redetermination upon the occurrence of certain events. The borrowing base of the credit facility will be the loan value assigned to the proved reserves attributable to our natural gas and crude oil interests, excluding proved reserves attributable to PDCM and our 29 affiliated partnerships. The credit facility is secured by a pledge of the stock of certain of our subsidiaries, mortgages of certain producing natural gas and crude oil properties and substantially all of our other assets. Neither PDCM nor the various limited partnerships that we have sponsored and continue to serve as the managing general partner are guarantors of the credit facility.

Our outstanding principal amount accrues interest at a varying interest rate that fluctuates with an alternate base rate (equal to the greater of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a premium and 1-month LIBOR plus a premium), or at our election, a rate equal to the rate for dollar deposits in the London interbank market for certain time periods. Additionally, commitment fees,

14

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

interest margin and other bank fees, charged as a component of interest, vary with our utilization of the facility. No principal payments are required until the credit agreement expires on November 5, 2015, or in the event that the borrowing base would fall below the outstanding balance. The credit facility contains covenants customary for agreements of this type.

We have outstanding an undrawn $18.7 million irrevocable standby letter of credit in favor of a third party transportation service provider. This letter of credit reduces the amount of available funds under our credit facility by an equal amount. We pay a fronting fee of 0.125% per annum and an additional quarterly maintenance fee equivalent to the spread over Eurodollar loans (2.0% per annum as of March 31, 2011) for the period the letter of credit remains outstanding. The letter of credit expires on May 22, 2012.

As of March 31, 2011, and December 31, 2010, we had no outstanding draws on our credit facility. We pay a fee of 0.5% per annum on the unutilized commitment on the available funds under our credit facility. As of March 31, 2011, the available funds under our credit facility were $302.5 million. The weighted average borrowing rate on our credit facility, including the letter of credit, was 0.6% per annum for the three months ended 2011 and 1.1% per annum for the three months ended 2010.

PDCM Credit Facility. PDCM has a credit facility dated as of April 30, 2010, with an initial borrowing base of $10 million. The credit facility is subject to and secured by PDCM's properties, including our proportionate share of such properties. The credit facility borrowing base is subject to size redetermination semiannually based upon a valuation of PDCM's reserves at December 31 and June 30; further, either PDCM or the lenders may request a redetermination upon the occurrence of certain events. Pursuant to the interests of the joint venture, the credit facility will be utilized by PDCM for the exploration and development of its Appalachian assets. As of March 31, 2011, there were no amounts outstanding related to this credit facility.

As of March 31, 2011, both the Company and PDCM were in compliance with all bank credit facility covenants and expect to remain in compliance throughout the next twelve-month period.

NOTE 8 - ASSET RETIREMENT OBLIGATIONS

The following table presents the changes in carrying amounts of the asset retirement obligations associated with our working interest in natural gas and crude oil properties.

Amount

(in thousands)

Balance at December 31, 2010 (1)

$

28,047

Change in ownership interest of PDCM

(485

)

Obligations incurred with development activites and assumed with acquisitions

450

Accretion expense

396

Obligations discharged with disposal of properties and asset retirements

(221

)

Balance at March 31, 2011

28,187

Less current portion

(250

)

Long-term portion

$

27,937

__________

(1)Includes $0.2 million as of December 31, 2010, related to assets held for sale.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Merger Agreements. In November 2010, pursuant to our previously announced partnership acquisition plan, we entered into separate merger agreements with three of our affiliated partnerships: PDC 2005-A Limited Partnership, PDC 2005-B Limited Partnership and the Rockies Region Private Limited Partnership (collectively, the "2005 Partnerships"). We serve as the managing general partner of each of the 2005 Partnerships. Definitive proxy statements for each of the 2005 Partnerships requesting approval for the applicable merger were mailed to the non-affiliated investor partners of the 2005 Partnerships on February 7, 2011. Pursuant to each merger agreement, if the merger is approved by the holders of a majority of the limited partnership units held by limited partners of that partnership not owned by us (the "non-affiliated investor partners"), as well as the satisfaction of other customary closing conditions, then such partnership will merge with and into a wholly-owned subsidiary of ours. In light of the recent rise in commodity prices, in late February 2011, we reevaluated the initial aggregate merger consideration of $36.4 million agreed to in the merger agreements for the 2005 Partnerships and proposed to offer supplemental merger consideration of $6.9 million to the non-affiliated investor partners of the 2005 Partnerships. In early May 2011, we mailed the proxy supplements to the non-affiliated investor partners of the 2005 Partnerships. The special meetings whereby non-affiliated investor partners of the 2005 Partnerships will have an opportunity to vote and approve the applicable merger agreements are currently scheduled for June 15, 2011. If the required approvals are received from the non-affiliated investor partners at the special meetings and various other closing conditions are satisfied, we expect the aggregate purchase price to acquire the 2005 Partnerships to be $43.3 million. We expect to finance the acquisition of the 2005 Partnerships by borrowing funds under our revolving credit facility.

15

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Drilling Rig Contract. In order to secure the services of a drilling rig, PDCM entered into a commitment with a drilling contractor for the services of a drilling rig. The commitment expires in October 2012. Included in production costs in the statement of operations for the three months ended 2011, we recognized a charge of $0.5 million related to our proportionate share of rig laydown costs. As of March 31, 2011, our proportionate share of PDCM's related maximum commitment through October 2012 was $5.3 million.

Firm Transportation Agreements. We have entered into contracts that provide firm transportation, sales and processing charges on pipeline systems through which we transport or sell our natural gas and the natural gas of working interest owners, PDCM, our affiliated partnerships and other third parties. These contracts require us to pay these transportation and processing charges whether the required volumes are delivered or not. Satisfaction of the volume requirements include volumes produced by us, volumes purchased from third parties and volumes produced by our joint venture and affiliated partnerships. We record in our financial statements only our share of costs based upon our working interest in the wells; however, the costs of all volume shortfalls will be borne by PDC. As of March 31, 2011, we have a liability in the amount of $3.1 million included in other liabilities on the balance sheet related to an agreement in our Piceance Basin. We are currently working with the gas purchaser to renegotiate the terms and timing of our volume requirements under this agreement. If we are not able to renegotiate this agreement or meet all expected future volumes, we may need to record an additional liability.

Includes a precedent agreement that becomes effective when a planned pipeline is placed in service, currently expected to be September 2012 and represents 10,629 MMcf of the total MMcf presented for each of the years ending March 31, 2013 and 2014, and 78,915 MMcf thereafter. This agreement will be null and void if the pipeline is not completed. In August 2009, we issued a letter of credit related to this agreement, see Note 7.

Litigation. The Company is involved in various legal proceedings that it considers normal to its business. The Company reviews the status of these proceedings on an ongoing basis and, from time to time, may settle or otherwise resolve these matters on terms and conditions that management believes are in the best interests of the Company. There are no assurances that settlements can be reached on acceptable terms or that adverse judgments, if any, in the remaining litigation will not exceed the amounts reserved. With the exception of the royalty lawsuit discussed below, and although the results cannot be known with certainty, we believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.

Royalty Owner Class Action

Gobel et al v. Petroleum Development Corporation, Case No. 09-C-40 in U. S. District Court, Northern District of West Virginia, filed on January 27, 2009

David W. Gobel, individually and allegedly as representative of all royalty owners in the Company's West Virginia oil and gas wells, filed a lawsuit against the Company alleging that we failed to properly pay royalties (the "Gobel lawsuit"). The allegations state that the Company improperly deducted certain charges and costs before applying the royalty percentage. Punitive damages are requested in addition to breach of contract, tort and fraud allegations. On August 31, 2010, the federal judge issued an order remanding the case to state court. On October 27, 2010, the state court set a trial date of April 2012.

In April 2011, the Company entered into an oral settlement agreement with respect to this lawsuit. The oral settlement agreement has been approved by the Company's Board of Directors and involves the payment of a total of $8,750,000. The parties are currently drafting definitive documentation to reflect the oral agreement. There can be no assurance that such definitive documentation will be completed on terms satisfactory to the Company. A hearing has been set for June 6, 2011, for the court to consider preliminary approval of the settlement. For the three months ended 2011, the Company recorded a charge to general and administrative expense in the statement of operations of $1.6 million. As of March 31, 2011, the Company had the total oral settlement accrued and included in other accrued expenses on the accompanying balance sheet.

16

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Environmental. Due to the nature of the natural gas and oil industry, we are exposed to environmental risks. We have various policies and procedures to avoid environmental contamination and mitigate the risks from environmental contamination. We conduct periodic reviews to identify changes in our environmental risk profile. Liabilities are accrued when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. As of March 31, 2011, and December 31, 2010, we had accrued environmental liabilities in the amount of $1.5 million and $1.7 million, respectively, included in other accrued expenses on the balance sheet. We are not aware of any environmental claims existing as of March 31, 2011, which have not been provided for or would otherwise have a material impact on our accompanying financial statements. However, there can be no assurance that current regulatory requirements will not change or unknown past non-compliance with environmental laws will not be discovered on our properties.

Partnership Repurchase Provision. Substantially all of our drilling programs contain a repurchase provision where investing partners may request that we purchase their partnership units at any time beginning with the third anniversary of the first cash distribution. The provision provides that we are obligated to purchase an aggregate of 10% of the initial subscriptions per calendar year (at a minimum price of four times the most recent 12 months' cash distributions from production), if repurchase is requested by investors, subject to our financial ability to do so. As of March 31, 2011, the maximum annual repurchase obligation for 2011, based upon the minimum price described above, was approximately $8.5 million. We believe we have adequate liquidity to meet this obligation. For the three months ended 2011, amounts paid for the repurchase of partnership units pursuant to this provision were immaterial.

Employment Agreements with Executive Officers. We have employment agreements with our Chief Executive Officer, Chief Financial Officer and other executive officers. The employment agreements provide for annual base salaries, eligibility for performance bonus compensation and other various benefits, including retirement and severance benefits.

If, within two years following a change of control of the Company ("change in control period"), either the Company terminates the executive officer without cause or the executive officer terminates employment for good reason (what is referred to as a "double trigger"), then the severance benefits owed equals three times the sum of the executive's highest annual base salary during the previous two years of employment immediately preceding the termination date and the executive's highest annual bonus paid or, in the case of two executive officers, paid or payable during the same two-year period. For one executive, in this calculation, the target bonus will be used as the minimum value for the first two years of employment. Where the Company terminates the executive officer without cause or the executive officer terminates employment for good reason outside of the change in control period, the severance benefits range from two times to three times, specific to the executive officer, the benefits noted above. For this purpose, a change of control and good reason correspond to the respective definitions of change of control and good reason under IRC 409A and the supporting Treasury regulations, with some differences. Under any of the above circumstances, the executive officer is also entitled under his employment agreement to (i) vesting of any unvested equity compensation (excluding all long-term incentive shares), (ii) reimbursement for any unpaid expenses, (iii) retirement benefits earned under the current and/or previous agreements, (iv) continued coverage under our medical plan at the Company's cost for the federal COBRA health continuation coverage period and (v) payment of any earned and unpaid bonus amounts. In addition, the executive officer is entitled to receive any benefits that he would have otherwise been entitled to receive under our qualified retirement plan, although those benefits are not increased or accelerated.

In the event that an executive officer is terminated for just cause, we are required to pay the executive officer his base salary through the termination date plus a partial year bonus; incentive, deferred, retirement or other compensation; and to provide any other benefits, which have been earned or become payable as of the termination date.

In the event that an executive officer voluntarily terminates his employment for other than good reason, he is entitled to receive (i) his base salary and bonus, provided, however, that with respect to the bonus, for certain executive officers, there will be no proration of the bonus if such executive leaves prior to the last day of the year and, with respect to the remaining executive officers, there will be no proration of the bonus in the event such executive officer leaves prior to March 31 in the year of his termination, (ii) any incentive, deferred or other compensation which has been earned or has become payable, but which has not yet been paid under the schedule originally contemplated in the agreement under which they were granted, (iii) any unpaid expense reimbursement and (iv) any other payments for benefits earned under the employment agreement or our plans.

In the event of death or disability, the executive is entitled to receive certain benefits. For this purpose, the definition of "disability" corresponds to the definition under IRC 409A and the supporting Treasury regulations. The benefits will (i) in the case of death be paid in a lump sum and be equal to the base salary that would otherwise have been paid for a six-month period following the termination date and (ii) in the case of disability be up to thirteen weeks of ongoing base salary plus a lump sum equal to six months of base salary.

Partnership Casualty Losses. As Managing General Partner of 29 partnerships, we have a potential liability for casualty losses in excess of the partnership assets and insurance. We believe the casualty insurance coverage that we and our subcontractors carry is adequate to meet this potential liability.

17

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 10 - STOCK-BASED COMPENSATION PLANS

The following table provides a summary of the impact of our outstanding stock-based compensation plans on the results of operations for the periods presented.

Three Months Ended March 31,

2011

2010

(in thousands)

Total stock-based compensation expense

$

1,545

$

1,005

Income tax benefit

(587

)

(386

)

Net income (loss) impact

$

958

$

619

Stock Appreciation Rights ("SARs")

The SARs will vest ratably over a three-year period and may be exercised at any point after vesting through March 2021. Pursuant to the terms of the awards, upon exercise, the executives will receive, in shares of common stock, the excess of the market price of the award on the date of exercise over the market price of the award on the date of issuance.

In March 2011, our Compensation Committee of our Board of Directors (the "Committee") awarded 31,552 SARs to our executive officers. The fair value of each SAR award was estimated on the date of grant using a Black-Scholes pricing model using the assumptions presented in the table below. The expected life of the award was estimated using historical stock option exercise behavior data. The risk-free interest rate was based on the U.S. Treasury yields approximating the expected life of the award in effect at the time of grant. Expected volatilities were based on our historical volatility. We do not expect to pay dividends, nor do we expect to declare dividends in the foreseeable future.

Three Months Ended

March 31, 2011

Expected term of the award

6 years

Risk-free interest rate

2.5

%

Volatility

60.2

%

Weighted average grant date fair value per share

$

25.22

The following table presents the changes in our SARs for the three months ended 2011.

Number ofSharesUnderlyingSARs

Grant Date Market PricePer Share

Average Remaining ContractualTerm(in years)

Aggregate IntrinsicValue(in thousands)

Outstanding at December 31, 2010

57,282

$

24.44

9.3

$

—

Awarded

31,552

43.95

10.0

—

Outstanding at March 31, 2011

88,834

31.37

9.4

1,478

Vested and expected to vest at March 31, 2011

79,951

31.37

9.4

1,330

Exercisable at March 31, 2011

—

—

—

—

The total compensation cost related to SARs granted and not yet recognized in our statement of operations as of March 31, 2011, was $1.2 million. The cost is expected to be recognized over a weighted average period of two years.

Restricted Stock Awards

Time-Based Awards. The following table presents the changes in non-vested time-based awards for the three months ended 2011. In March 2011, the Committee awarded a total of 43,256 time-based restricted shares to our executive officers that vest ratably over a three-year period ending on March 12, 2014.

The total compensation cost related to non-vested time-based awards expected to vest and not yet recognized in our statements of operations as of March 31, 2011, was $9.9 million. This cost is expected to be recognized over a weighted average period of 2.4 years.

18

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Shares

Weighted AverageGrant-DateFair Value per Share

Non-vested at December 31, 2010

525,715

$

25.53

Granted

48,173

43.95

Vested

(30,137

)

29.26

Forfeited

(9,707

)

23.39

Non-vested at March 31, 2011

534,044

27.02

As of/Three Months Ended

March 31, 2011

(in thousands, except per share data)

Total intrinsic value of time-based awards vested

$

1,400

Total intrinsic value of time-based awards non-vested

25,639

Market price per common share as of March 31

48.01

Market-Based Awards. The fair value of the market-based awards is amortized ratably over the requisite service period, primarily three years. Generally, the market-based shares vest if the participant is continuously employed throughout the performance period and the market-based performance measure is achieved, with a maximum vesting period of five years. All compensation cost related to the market-based awards will be recognized if the requisite service period is fulfilled, even if the market condition is not achieved.

In March 2011, the Committee awarded a total of 13,531 market-based restricted shares to our executive officers. In addition to continuous employment, the vesting of these shares is contingent on the Company's total shareholder return ("TSR"), which is essentially the Company’s stock price change including any dividends, as compared to the TSR of a set group of 11 peers. The shares are measured over a three-year period ending on December 31, 2013, and can result in a payout between zero and 200% of the total shares awarded. The weighted average grant date fair value per market-based share for these awards granted was computed using the Monte Carlo pricing model using the weighted average assumptions presented in the table below.

Three Months Ended

March 31, 2011

Expected term of award

3 years

Risk-free interest rate

1.1

%

Volatility

74.2

%

Weighted average grant date fair value per share

$

58.53

Expected volatility was based on a blend of our historical and implied volatility. The expected lives of the awards were based on the requisite service period. The risk-free interest rate was based on the U.S. Treasury yields in effect at the time of grant or modification and extrapolated to approximate the life of the award. We do not expect to pay dividends, nor do we expect to declare dividends in the foreseeable future.

The following table presents the change in non-vested market-based awards for the three months ended 2011.

Shares

Weighted AverageGrant-DateFair Value per Share

Non-vested at December 31, 2010

79,550

$

32.52

Granted

13,531

58.53

Non-vested at March 31, 2011

93,081

36.30

The total compensation cost related to non-vested market-based awards expected to vest and not yet recognized in our statement of operations as of March 31, 2011 was $0.8 million. This cost is expected to be recognized over a weighted average period of 2.7 years.

19

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 11 - EARNINGS PER SHARE

The following is a reconciliation of weighted average diluted shares outstanding.